Living Trust as a Contingent Beneficiary...Yes or No?

[Janz Hobbs]

I'm not sure what qualifications this "financial planner" has, but if he/she is simply a financial planner then he/she is not qualified to opine on that since that answer calls for legal advice and moreover is outside the scope of what financial planners are skilled at. Wills leave assets to trusts all the time, and there are good reasons for doing that. So saying that a trust should never be a beneficiary of an estate is simply wrong. That's the first indication that this financial planner is probably not someone whom you want to look to for advice.

The main purpose for most people in using a revocable living trust is to avoid probate. Probate is in some states rather expensive. (I don't know about Texas, but I don't get the sense that it is among the states where probate costs are known to be quite high.) Probate can be slow. That depends on the details of the probate process in the state, what assets are involved, and what debts have to be sorted out. And probate is a public record. Anyone can go to the courthouse and see the will and anything else that was filed in the court during the probate process.

Assets placed in a living trust (which is the popular name for what the law calls an inter vivos trust) do not become part of the probate estate at all. So the assets already in the trust at death never become part of the probate process. And the trust document does not get filed with the courts unless there is a dispute about the trust that ends up going to court. So trusts are private. And since the assets in the trust are not subject to probate, usually the trust can be settled out faster than the probate estate would be. Making the trust revocable gives two additional benefits. First, it gives you flexibility because if your needs change you can undo the trust and do something different. Second, a revocable trust is a grantor trust under the Internal Revenue Code (IRC). Grantor trusts are ignored under the tax law and the assets in the trust are treated as though they are assets of the grantor. So you get the same tax advantages as you would if your assets were not in a trust and instead go to probate, most notably the step up in basis in the assets.

But even with a revocable living trust, often not every asset manages to make into the trust before you die. For that reason, it's a smart idea to have a will to address stray assets that didn't make it into the trust. That will can be very simple and just give all the probate estate assets to the trust. This sort of will is called a "pour over will" because it pours all the assets in the estate over into the trust.

What you usually would not do is have everything go to your estate and then have the estate give all that to the trust. Doing that means all your assets still go through probate, and then you send the assets to a trust before going to the final beneficiaries. That simply adds an extra step that in most cases does not benefit you at all.

So if you want to use a revocable living trust for avoiding probate make sure you fund it with at least your most significant assets. Then have a will to deal with anything that doesn't get put into the trust before you die.

For a lot of assets, you have other options for avoiding probate that do not involve a trust, like naming pay on death beneficiaries on your financial accounts or owning property jointly with someone else as joint tenants with a right of survivorship.

And you can always just have everything to probate and have your will deal with it all.

Each person's situation is different, so to come up with the plan that works best for you, see an estate planning attorney (not a financial planner). The attorney can advise you on what makes the best sense for your situation and can draft the documents you need to do it. The financial planner cannot do that for you.

Thank you for this in depth, thoughtful response. Even though I clarified (just now) that my question was pertaining to a life insurance policy, you clarified some other things so succinctly and I appreciate this.

 

[zddoodah]

Whether or not you list the trust or each other as beneficiaries on a life insurance policy makes no difference in terms of probate since life insurance proceeds are not part of the deceased's probate estate. "Tax_Counsel" can opine about any tax differences between the two. However, since life insurance proceeds are not generally taxable, I doubt it makes much difference.

P.S. As far as what your "financial planner" told you, when my sister died 12 years ago, her trust was designated as beneficiary on all financial accounts, including a life insurance possibility. Those designations caused no problems and, in fact, made it easier for me as successor trustee of the trust.

 

[Tax Counsel]

All - my apologies. I failed to specify that the question was pertaining to a beneficiary form for a life insurance policy - that's probably why this thread was moved here. We have taken care of all of our trust/will issues. Also, I have spoken to three attorneys and have gotten three different answers...thus my inquiry here.

Generally nothing wrong with making the trust your beneficiary on a life insurance insurance policy that you own. The tax treatment will be the same and what goes to the trust is simply cash that the trust can disburse.

Our original attorney told us to list the trust as primary beneficiary on everything (401ks, annuities, beneficiary forms, etc.).

Where it can be problem, however, is with retirement assets like 401(k) accounts, annuities, etc. Giving them to a trust when you die may accelerate the required time period for distribution of the account, which means accelerating and perhaps increasing the taxes paid by the beneficiary on them. For these I would generally agree it's better to designate beneficiaries directly, at least when those beneficiaries are individuals.

 

[John Hazelwood]

A trust would be wise, in my opinion.

 

[justblue]

A trust would be wise, in my opinion.

Stop posting to dead threads.

 

[zddoodah]

A trust would be wise, in my opinion.

And if you are going to resurrect dead threads, at least say something intelligent. Given the level of complexity of the discussion in this thread, saying, "a trust would be wise," is utterly useless.